Amid global economic stagnation and rising political uncertainty in a low-yield world, investors should look beyond the comfort of conventional asset classes with a cautious, diversified approach for better risk-adjusted returns, says Aberdeen Standard Investments.
James McCann, Senior Global Economist at Aberdeen Standard Investments, highlights key themes that are set to influence the global economy and investment landscape in 2020:
Global economic stagnation but not recession
“Secular stagnation is likely to define the global economy for the next five years. Going into 2020, rising policy and political uncertainty will continue to weigh on industrial, trade and investment activities. We have downgraded our global GDP growth forecasts for 2020 and 2021 to 3.1%. A recession could be avoided next year but the risks have clearly increased.”
Dovish central bank policies cushion slowdown
“Significant monetary easing by central banks should keep growth low but positive. In developed markets we expect more monetary easing from at least Europe, the US, Australia and Canada; and, in emerging market, from Brazil, China, India and Russia. More fiscal stimulus is likely too and such measures should help cushion any market shocks.”
Political, trade risks dampen sentiment
“Political uncertainty will drag on global trade, business investment and services in 2020. US-China trade tensions remain a key risk and we do not foresee a quick resolution. Korea and Taiwan are vulnerable to trade conflict centered on the technology sector; while the dispute between Japan and Korea will further disrupt the global tech supply chain.”
Traditional assets returns under threat
“We expect investment returns from traditional assets to be much lower than in the past. A significant amount of government bonds are already yielding negative. The late stage of the business cycle and the lack of room for corporate margin expansion suggest that equity returns will be below their long-term average. The classic rotation from equities to government bonds and investment grade credit will no longer be appropriate in this cycle.”
Structural themes create long-term opportunities
“In the next decade, structural themes such as climate change and technological disruptions are set to shape markets. An increasingly important driver of long-term asset class returns will be environmental, social and governance (ESG) factors, including demographic shifts, governance trends and environmental risks. As innovative technologies such as 5G and artificial intelligence create new opportunities, the technology sector outlook may see significant improvement from the current low base over the long run.”
How should investors position themselves in this environment?
Chris DeMeo, Head of Client Solutions for the Americas region at Aberdeen Standard Investments, comments:
“This backdrop of secular stagnation and geopolitical tension will focus investors’ minds on ensuring portfolios are diversified beyond the conventional equity-bond allocations, and will lead many towards less familiar asset classes in search of returns.
“The logical conclusion for many will be private markets because of the diversification that this part of the market offers and the potential for it to generate significantly higher returns than public markets. In addition, the long-term prospects for local currency EM sovereign debt are unusually strong and I am sure 2020 will see clients continue to ask how we can help them solve their ESG challenges.
“But there is a real move in the industry away from the generic and towards the specific. All of these considerations have to be made in the round, and must reflect the specific needs that each investor has. That is only going to continue as clients grapple with how to match up the very broad themes happening at the global level with the unique circumstances of their portfolios. This is going to demand ever more tailored approaches that require an intimate understanding of both the exact challenge facing the client and the possible solutions to it.”
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Notes to editors
- Aberdeen Standard Investments has relationships with around 500 financial sponsors across approximately 1000 funds globally.
- Aberdeen Standard Investments is a leading global asset manager dedicated to creating long-term value for our clients, and is a brand of the investment businesses of Aberdeen Asset Management and Standard Life Investments.
- With over 1,000 investment professionals we manage $669.1 billion* of assets worldwide. We have clients in 80 countries supported by 50 relationship offices. This ensures we are close to our clients and the markets in which they invest.
- We are high-conviction, long-term investors who believe teamwork and collaboration are the key to delivering repeatable, strong investment performance.
- Aberdeen Standard Investments is the asset management business of Standard Life Aberdeen plc, one of the world’s largest investment companies.
- Standard Life Aberdeen plc is headquartered in Scotland. It has around 1.2 million shareholders and is listed on the London Stock Exchange. The Standard Life Aberdeen group was formed by the merger of Standard Life plc and Aberdeen Asset Management PLC on August 14, 2017.
* Standard Life Aberdeen AUM as of June 30, 2019.
In the United States, Aberdeen Standard Investments is the marketing name for the following affiliated, registered investment advisers: Aberdeen Standard Investments Inc., Aberdeen Asset Managers Ltd., Aberdeen Standard Investments Australia Ltd., Aberdeen Standard Investments (Asia) Ltd., Aberdeen Capital Management, LLC, Aberdeen Standard Investments ETFs Advisors LLC and Standard Life Investments (Corporate Funds) Ltd.